Catastrophe bonds advised for Australia says Swiss Re

With the Australian government seeking to impose a disaster tax on its population to help pay for the damage caused by the severe floods and cyclone Yasi in Queensland talk has turned to what the government should really be doing to ensure it has financial protection against natural disasters. Now a spokesperson for Swiss Re has come forward and advised the issuance of catastrophe bonds as protection for the future.

A flood tax is likely to be in place in a matter of weeks once it gets through the Australian parliament but that is not the answer for the future. Some Senators in the parliament say they will only support the governments call for the disaster tax if the government puts in place proper natural disaster re/insurance plans to lessen the financial burden on taxpayers in future years. That’s the view held by Swiss Re too who would like to see the government issue catastrophe bonds as an alternative to the flood damage levy.

Putting a disaster tax in place and also planning to make AU$3.8 billion in spending cuts to help pay for the damage, the Australia government seems to have a reactive approach to dealing with disaster. What is really required to help the country plan for a future of increasing losses from natural disasters is a proactive approach to risk management and risk transfer using instruments such as catastrophe bonds, weather derivatives and weather-index insurance.

Mark Senkevics, head of Swiss Re in Australia and New Zealand, was interviewed on an Australian local radio station and advised that a “pre-emptive approach to financing disaster relief” was required. He went on to say that “We would like to see some form of insurance from government rather than a levy after the event” and specified catastrophe bonds as a method to transfer the burden of disaster risks away from the government and taxpayers and essentially have the funds to recover from disaster secured.

Some market participants we have spoken with go a step further and advise that the disaster risk rating in Australia has risen so significantly in recent years that both a catastrophe backstop provided by cat bonds and proactive use of weather risk management techniques must be used to combat the risk of disasters and ensure climate risks are managed adequately. Businesses, such as the mining industry, in the Queensland area could have benefited from the use of weather-index insurance policies or weather derivatives. Instruments like this would have ensured a quick payout in response to the rainfall levels, possibly much more quickly than their business interruption insurance policies will payout.

In reality the best approach is to take a holistic view of the risks faced and utilise the best risk management and risk transfer tools on offer. For a country with a climate that is becoming as volatile as Australia that surely has to include the use of catastrophe bonds and weather risk management techniques.

The Weather Risk Management Association are holding their 2011 Australian Meeting event in Melbourne, Australia on the 9th-11th March this year. This provides a great opportunity for the weather risk management and re/insurance sectors to demonstrate the options available to the Australian government and businesses to ease the effects of disasters in the future. It’s also a chance for Australian interests to learn more about the options available to them and connect with potential partners.